Is The Fed Panic Already Fading? | Weekly Roundup

Markets appear to be passing peak inflation and peak growth for the year, with the fiscal impulse expected to fade in the second half. One-year breakeven inflation rates sit near 2 percent, and the speakers dismissed Bank of America's forecast of three rate hikes this year as implausible in that context. Powell's recent comments were read as implicit forward guidance designed to avoid hiking, and Kevin Warsh is believed to favor a hawkish hold rather than a genuine increase. If the Fed skips July, the speakers expect inflation to keep falling and no hike to occur before the election, with the Fed too scarred by its transitory misjudgment to move in front of an election while inflation is declining.

The dollar looks toppy and appears to be rolling over, making recently beaten-down debasement trade assets attractive at current levels. Long-end yields are leading the front end lower, signaling neither runaway inflation nor a growth collapse, while the two-year yield remains anchored to Fed communications. The speakers argued that raising real rates further would only create market dislocations the Fed would then have to reverse, and that balance sheet policy is more consequential than front-end rate moves because the yield curve is historically suppressed at the long end. Warsh reportedly referenced balance sheet rejiggering approximately five times in a recent speech, reinforcing that view.

Gasoline prices have not followed crude oil lower because finished product reserves were depleted and refinery capacity utilization has been maxing out, causing crack spreads to surge. That gap should close after peak summer driving season as supply chains normalize, but even transitory oil-driven inflation reinforces core inflation by boosting consumer spending in other categories. Getting core inflation below 3 percent is not feasible while the government runs deficits of 5 to 6 percent of GDP. The speakers also noted that monetary policy is poorly suited to address supply-driven inelastic price surges in sectors like semiconductors, and that higher rates increase income for money market holders, partially offsetting demand destruction.

The Mag Seven has underperformed all major indices in a straight line lower since late October or early November. Until early June, the DRAM ETF and Mag Seven stocks were positively correlated, but after Google announced an 80 billion dollar equity issuance the correlation flipped negative. Hyperscalers are being rerated lower on a multiple basis because they are shifting from cash-flow-rich, buyback-heavy profiles to leveraged balance sheets with diminished free cash flow, the same multiple compression dynamic that already hit software. These companies cannot stop AI spending without ceding model share to free Chinese and open source alternatives, creating an unwinnable dynamic where upside on large cap tech is very capped for the foreseeable future. Because the Mag Seven represents roughly 40 percent of the S&P 500, its sustained drift lower will eventually matter for overall market health even if rotation into industrials and smaller caps is healthy for main street companies.

Implied correlation is near 10, compared to 40 during prior selloff periods, indicating a rotational market rather than a crash scenario. Program trades are rotating out of large cap tech into industrials and banks, with those sectors making new highs while high-flying and meme names are being taken down. Return dispersion matches levels seen during the 2010s secular stagnation period, and the speakers drew a parallel to the post-2000 rotation from tech into small caps trading at low valuations.

Brian Reynolds's credit cycle framework holds that debt is oversupplied into a single sector until it collapses, with housing in 2008, oil producers in 2015, and gold in 2014 as prior examples. The speakers apply this framework directly to AI, arguing the sector is experiencing the same debt oversupply dynamic that preceded those earlier busts. SpaceX issued bonds seeking 30 billion dollars, received 90 billion dollars in orders, and ultimately raised 90 billion dollars, illustrating the strength of private credit demand currently flowing through boomer savings, pensions, and international buyers.

MicroStrategy stock is down approximately 90 percent from its highs. The preferred security is paying roughly 12 percent yield and trading in the 70s, with the debt and preferred service burden representing 6 percent annual dilution to common shareholders if Bitcoin stays flat. The company is not at liquidation-level leverage but sits in an unresolved limbo that does not yet offer good risk-adjusted returns. Bitcoin miners are finding it more economically attractive to sell power to AI companies via long-term deals than to mine at current prices, with rising electricity costs from AI data center demand adding further pressure. The speakers expect miners to overbuild AI capacity and eventually flip back to Bitcoin mining when AI demand normalizes, framing the dynamic as a centralization versus decentralization tension with electricity as the core input.